NEW YORK: Investors in the volatile U.S. stock market brace for what could be one of the heaviest trading days of the year on Friday as FTSE Russell completes rebalancing of indices that are tracked by billions of dollars of investor funds.
FTSE Russell updates the constituents of its indices once a year at the end of June to better reflect the wider markets. This prompts fund managers who have benchmarked their performance against indices to align their own portfolios with the changes. Some 12 trillion dollars are indexed to the Russells US indices.
The resulting buying and selling tends to peak at the close of the trading session before the rebuild is final, and some investors are looking to trade on any price dislocation that may result. Total trading volume on Replenishment Day 2021 topped 16 billion shares, making it one of the busiest sessions of the past year.
While past rebalancing has generally gone off without a hitch, some investors said the event is more likely to exacerbate volatility this year, after concerns over a more hawkish Federal Reserve sent stocks and bonds tumbling. and intensified market fluctuations in recent weeks.
The benchmark S&P 500 index has fallen more than 21% year-to-date as the Fed tightens monetary policy to rein in soaring inflation.
The Federal Reserve is raising interest rates, we are seeing liquidity drying up and while there is plenty of liquidity in the stock market, certainly with negative sentiment it will be more difficult to achieve this rebalancing,” said Rob Haworth, chief investment strategist at US Bank Wealth Management in Seattle.
One of the biggest changes this year will see Meta Platforms, formerly Facebook, move to the Russell 1000 Value Index, normally the domain of companies perceived to be trading below their fundamentals. At the same time, energy stocks will receive a larger weighting in the Russell 1000 Growth Index, following a meteoric rally over the past year.
Meta’s move to the Russell 1000 Value Index follows a more than 50% drop in the social media giant’s shares this year on the company’s warnings of falling revenue after a furious decade of growth.
The change will drop the weighting of the communication services sector in the Russell 1000 Growth Index to 8% from 9.9%, while increasing the weighting of sectors in the Russell 1000 Value Index to 8.7% from 6.9%, according to Jefferies.
Meanwhile, the outstanding performance of the energy sector will lead to a larger weighting of energy stocks in the Russell Growth indices, Jefferies said.
The energy sector, which has soared nearly 40% since last year’s replenishment on the back of a sharp rise in crude prices, will see its weight increase to 1.7% in the Russell 1000 Growth Index , compared to 0.6%.
The move is even more pronounced in the Russell MidCap Growth Index, with energy taking a weighting of 5.1%, down from 3.3%.
“Growth managers who haven’t had to pay attention to energy for several years now need to pay attention to the sector,” said Steve DeSanctis, equity strategist at Jefferies in New York.
Given the volume of trading and the number of shares involved, FTSE Russell is taking steps to be transparent about the rules for inclusion. It starts in May on its “ranking day”, which determines the market capitalization bands a stock must be in to be included. The following steps include preliminary lists of index additions and deletions.
“We don’t want to make unnecessary changes, any change in methodology is thoughtful,” said Catherine Yoshimoto, director of product management for US Russell indices at FTSE Russell. We’re looking at where there might be future improvements, but the goal is definitely to keep it stable (Reporting by Chuck Mikolajczak; Editing by Cynthia Osterman)